Archive for the ‘Credit Score and Credit Information’ Category

Hi everybody. Rowan Smith from the Mortgage Centre. I want to talk today about credit, specifically someone that doesn’t have a reporting credit score. I had a client call me this week who has tons of assets. They ran two different companies. The companies, the companies not her, have fantastic credit. The companies themselves have several hundred thousand dollars in clear assets cash. Now, she came into her bank before she spoke to me and the bank looked at her and said, “I’m sorry, we can’t help you. You don’t have a credit score.” She said, “Why not? I’ve got all these assets.”

Well, assets don’t report on your credit bureau. It doesn’t matter if you have $10 million in the bank. The credit bureau is about just that: credit. They want to specifically see that you know how to manage monthly payments without missing them, without falling into arrears or getting write-offs. If you’ve been paying cash your whole life for something I applaud that and think that that’s fantastic.

You haven’t had to borrow to live most of your life, certainly not the trend in Canada. Unfortunately, it’s not great for borrowing because you have no proof that you have a capacity to make payments or to manage a debt at all even though you’ve managed your savings fantastically. How do you get out of this trap?

First off, go and get a credit card. If you’ve got good assets and you’ve been paying everything with cash then your credit score will be nil for the most part. Apply to get a Visa. Start with that. Do you have to use it all the time? Not necessarily. Use it from time to time, make sure you pay it off. Try to keep that limit over $1,000, though. Ideally you want to get up over $5,000 because when the credit lenders look at you, especially if you’re applying for a mortgage, they want to make sure you can handle a payment that’s more than $50 a month.

If you’re looking to build and establish credit start with one card. You might want to get a couple. Don’t go crazy. 10 of them is not better than three or four and it just has more chances that one of those payments will get forgotten. Establish that score, get going on it, and then after a couple of years, or realistically even just one year of on time payments and reporting history, we should be able to get you into something.

That will establish that much needed credit history for vehicle loans, vehicle leases, commercial loans, all that type of thing.

If you need any help with this or if your bank is telling you you can’t get a Visa even though you’re offering to put your own money up as security I have a solution for you so please give me a call. It’s Rowan Smith from the Mortgage Centre.

Transcript of Video:
Hey everyone, Rowan Smith with the Mortgage Centre. I want to address a question a client came up with me on with the credit bureau. And that is, he wanted to know why his extra payments weren’t reflected.

The credit bureau is just a recording of debt payment history and how much your minimum payments are on a particular line of credit, and how your credit history is in terms of your repayment over the long last five years. Read the rest of this entry »

This is a complaint that I hear from people from time to time. They pull their own credit score, see a number over 700 and assume that they have good credit. Then, when they talk to me, I tell them they likely won’t qualify for a mortgage due to credit history and they nearly fall off their chair.

The media has done a good job of getting out there what a good credit score is. 700 as a “beacon score” is, by all accounts, a very good score. However, there are two other elements to credit that need to be looked at other than the score:

1. Credit Depth

2. Credit Breadth

CREDIT DEPTH:
This is where a lender looks at an account and sees how long you have had a credit record. If you only have 4 months history with your only credit card, your score may be 750 but that is meaningless. We call this a “forced beacon,” and lenders want to see a long track record of good payment, not just a high number.

CREDIT BREADTH:
This refers to the number of credit accounts you actively hold. Having multiple accounts doesn’t hurt you! In fact, look at it this way: if you have 1 visa account, and you go on vacation and miss a payment, you are delinquent on 100% of your available credit facilities. However, if you have a visa, mastercard, and car loan, and you slip up on one payment, you still have other unblemished accounts to bolster your score. So, having multiple types of credit is also helpful: car loan, visa, mastercard, etc… Now, there is a limit here: too many, and you may screw up as management of the accounts becomes difficult, but too few, and one slip up will have that 700 score down to 530 before you even realize you are late.

Just having a high score isn’t enough, and people often get hung up on the number rather than the underlying credit, and you can be sure, the lenders look at more than just the number.

On every mortgage application, one of the first questions we hear from the lender is: can you send me their credit score. More and more borrowers are becoming aware that the manner in which they have handled their bills, over the past 5 years, has a material impact on their terms and rates on mortgage financing today. Just because a debt that went bad due to a divorce was ultimately paid, the effect can be long lasting, embarassing, and detrimental to future credit applications.

A nice breakdown of how credit scores are calculated came across my desk today and I wanted to post it so that people can see how their score is establisehed (or harmed):

In Canada we refer to this as your “Beacon Score” but in the USA it is more common to hear it referred to as a “FICO Score”

So, what does this all mean?

Past Payment History: Well, this one is obvious. If you miss a payment, it will show up on your credit and will have a VERY detrimental effect. However, in order to qualify as a “missed” payment, you needn’t be a day or week late. You must be really late. You have be one full payment cycle late before it shows up. So, if your bill is due on the 15th of June, and you forget and don’t pay it until the end of June, it is likely not going to show up on your credit bureau. However, if you miss the June 15th payment, and then miss the next one on July 15th, it absolutely will show up!

Credit Utilization: This the percentage of available credit being used. However, the credit score is calculated by a dumb computer so it doesn’t really do this calculation well. For example, if you owe $450 on a visa with a $500 limit then to the computer that does the scoring, that means you are utilizing 90% of your available credit. This is a very high percentage, and your score will suffer for it. However, if you owe a $450 on a $5,000 visa, it will have a positive effect on your score as the computer will see you are using less than 10% of available credit (even though the amount owing is the same). So, how you allocate your debt is important. It is far better to spread it out over several accounts, than load up one card. Then again, if you pay it off every month in full, you never have to worry about this.

Length of Credit History: The longest that an item remains on your credit is 72 months or 6 years. Each “Trade Line” or account reports the number of months reporting, and the longer the better. This can be important because people may have a Sears card they forget about that has 72 months reporting of good usage (even though they never ues it) and they always say, “should I cancel it?” I wouldn’t. That long lasting, but still current, account has a very positive impact on your score that can help mitigate other areas you may not score as well on.

Types of Credit in Use: Certain types of credit are worse than others. For example, finance companies (Wells Fargo, Citibank, etc…) score low, whereas visa cards and revolving credit facilities score high. Also, the number of recently opened accounts has an impact.

Inquires: This is the most misunderstood portion of the bureau, but one that people guard jealously. The more “inquiries” (companies looking at your credit score) the lower your score. However, you can see this accounts for only 10% of the score. Also, the folks operating the credit bureau don’t want to hamper you from shopping around, so all applications done within a 7 day period (for a similar type of account – mortgage versus finance company, for example) count as 1. More will show up, but the impact on your score is minimal. Also, you are allowed to have inquiries! Just because an inquiry was on there, doesn’t mean your score is low. However, if you apply at TD for a visa, RBC for a loan, a finance company for a secured card, and then Hydro pulls your bureau as well, you can expect it to drop. How much? Even then, it might be a few points. If you score well in other areas, you shouldn’t even be given this a thought. However, if you are re-building your score, you should monitor this carefully.

SCORES AND INTERPRETATION:

Minimum = 300
(Lowest I’ve ever seen is 393)

Maximum = 900
(Highest I’ve ever seen is 826)

Average = 660
(More likely 660-680)

A good score = 680+

A great score = 700+

So that should give you a good primer on what scores mean, how it is calculated, and what you can do to preserve yours.

Your credit is like your reputation: it takes years to build, and only a couple stupid moves to tear it all down…

I have been taking more and more inquiries about foreclosures lately as people are looking for a good deal. The media, in particular late night TV, has glorified foreclosures as a method of finding amazingly discounted properties at low prices, that you can buy up below market value, and reap the rewards. While this opportunity exists, it really exists more with PRE-FORECLOSURES than with Foreclosures.

Here is the general policy with a foreclosure. It is important to understand this process, as you will then understand that by the time you get wind of the foreclosure from public information such as MLS data, the opportunity to buy it below market value will likely be passed.

PRE-FORECLOSURE PERIOD

Generally, lenders do not advertise when their clients are in arrears. This has everything to do with privacy laws, and also, people DO get caught up sometimes. Lenders try to give their clients the benefit of the doubt, and they don’t initiate foreclosure proceedings the moment the homeowner goes into arrears. They usually give them somewhere between 2 and 3 months to get caught up.

This is the best time to buy a pre-foreclosure. Usually, the borrower knows they are in financial difficulty (they aren’t able to make payments) and all sorts of things will be running though their head: refinance? Sell and pay out the mortgage(s)? Get a roommate? Etc.. All this will have them worried. Oftentimes, during this period they may not be doing all the required maintenance of the house as they scramble to try and get money put together for mortgage payments.

IN FORECLOSURE

If the arrears continues for 2-3 months, the lender will petition the borrower into court, and will request an “ORDER NISI” which is a ruling that if the borrower doesn’t “redeem” (pay their arrears) within 6 months from the date of the Order Nisi being issued, then the mortgage holder (lender) can take over the property, evict the owner, and sell it or rent it out for their own profit. Once the 6 months is up, the court will issue an “ORDER ABSOLUTE” which hands the house (and any remaining equity) over to the lender. It becomes the lender’s property.

Throughout this 6 month period of time, we call that being “in foreclosure” as it is during the process of foreclosing (lender taking over the property).

COURT ORDERED SALE

This is usually part of the foreclosure process, but only comes up when the lender’s equity is threatened. For example, if the lender does a mortgage for $375,000 on a $400,000 home with $2,500 a month payments, then this means that it will take 10 months (25000 / 2500) of late payments before the equity is wiped out due to accruing interest and the lender starts losing money. Now assume the market value slips by 5% (VERY normal) that leaves only $5000 equity in the property meaning that if the client is 2 months in arrears the lender’s position is wiped out! If the client is going to get 6 months to redeem and get caught up, the lender could lose a LOT more than their initial investment (their investment is your mortgage)!

In this situation, if it appears that the lender will lose money, they can approach the court and ask for “Conduct of Sale” meaning they are allowed to list the property (with a realtor of their choice) and sell it. You can tell if a listing on the MLS from your realtor is a Court Ordered Sale by looking at the portion where it says “Owner” and if it is a financial institution’s name on there, you can be assured it is a Court Ordered Sale.

So, the court has ordered the sale, and the lender desperately wants to sell. You can get a great deal on this property, right?

WRONG! Any sale has to be okayed by the court. There is typically a day where your offer is read into court, along with any other offers, and the court awards the highest. I have seen it, many times, where the property ends up going for MORE than market value as buyers get swept away in the heat of competition and the emotional process of buying their home!

Bottom line: just because it is a court ordered sale, doesn’t mean it will go for a low price. Oh, sure, it COULD be a great deal if you are the only one offering the price, but this is ultra rare in Canada (common in the US) as most buyers and realtors are very savvy on this process here in Vancouver due to our high prices and recent massive price run up.

POST FORECLOSURE

Once the lender has foreclosed and taken title, they can then sell the property, live in it, rent it out, or do whatever they wish. It is their property now. During this period of time the property will typically go up for sale on the MLS system in your area. The lender will usually just want to get whatever their mortgage money is back and move on, so they MAY accept a slightly lower-than-market-value offer for the property if they can quickly sell and get their money back. Why? Because their money is tied up in the property and they could be lending it out and earning money on it in the marketplace with another borrower.

Once the property is sold, the lender takes all money required to pay them off, pay all lawyers, pay for all services relating to disposing of the property, and then they pay the remainder (if any) to the borrower. Typically, there is no leftover funds or the borrower would have found a way to pay the arrears to preserve the equity.

WHY LENDER’S FORECLOSE

In times of stable or rising markets, the 6 months is usually allowed to pass before the lender gets aggitated. However, if the arrears and late payments are really adding up, and if it appears that the lender may take a loss the longer this process goes on. Why will they take a loss? I have been in this situation as a private lender, and this was how it went:

The client came to me and asked to borrow $20,000 as a 2nd mortgage. Their home was worth $440,000 and they had a 1st mortgage with a Trust company for $350,000 and payments of interest only for $2,750 per month. I agreed to lend them the money as they were a few months in arrears and needed some cash to do some renovations to install a suite in the basement that they could rent out and earn an additional $700 per month.

I agreed to loan them the money, and they bounced the very first cheque! And the second! I got contacted in month three by the 1st mortgage company who told me they were initiating foreclosure proceedings as they were not getting paid either!

I looked over the numbers, and there was a LOT of equity, so I wasn’t worried. However, then the market took a shift lower (September 2008) and lost 10% almost overnight!!! The property went from $440,000 to $396,000!!!

I saw the writing on the wall and immediately requested Conduct of Sale so that I could sell the property, pay out the 1st mortgage, and get my money back. We were awarded Conduct of Sale and put it on the market for $379,000 to get a fast sale. No luck.

It’s been on the market for months, and as of this article, it appears that I will be losing the money I loaned to these people.

So why did I lend it, you may ask? The clients came to me desperate. The wife had just recovered from liver cancer and was back at work. Both husband and wife were working full time jobs that made JUST enough for them to cover their payments. Plus, they were going to renovate and put a suite in so they would be able to earn $700 more per month. We had cleaned up all the issues on their credit, and at 78% financing it looked like a safe deal. In hindsight, it taught me a valuable lesson about lending and why foreclosures aren’t a great deal all the time:

1. The property was in poor repair by the time I got conduct of sale as they had done no maintenance in the past couple years

2. The arrears were stacking up on the 1st mortgage and ultimately wiped me out.

3. The market can move quickly and far

So, if someone were to come along today and offer to buy that property off of us, we would sell it at a tremendous discount and someone could get it for a great deal! However, we are not going to spend money to advertise it as we are already losing our investment, so unless someone knows about me, my business, or this blog, they will never know what a great deal is sitting out here or how desperate the sellers really are.

The only want to get quality information on foreclosures is either to:

1. Work with a foreclosure lawyer who is willing to forward you their list of foreclosures

2. Get in with a mortgage broker (such as myself) who can tell you of clients in PRE-foreclosure

3. Listen to people that are going through divorces, deaths in the family, etc… as they often have a need to get rid of property soon as they may be distressed and going to lose it

4. Look at the court docket for what is appearing – you have to go to the courthouse everyday (or know how to dig it out online – not easy) and see lots of “John Smith vs. TD Bank” and “Ray Horshman vs. Capital Direct” or other such things. When those people leave the courtroom, TALK TO THEM.

Other than this, there is no LIST of foreclosures, and certainly no list of PRE-foreclosures. It takes research, hard work, or connections (usually the latter) to find gems amongst the PILE of deals in foreclosure.

Your credit is one of the most important things that a lender looks at when evaluating you and your application for a mortgage. To many people this is an unfair examination of factors that are often beyond your control. While this might be true, it is also true that some people manage to maintain perfect credit through all sorts of life’s obstacles. How do they do it? That is what this report is going to outline in specific detail. By the end of reading this report, you will have a detailed action plan that you can put into practice to begin to rebuild your credit immediately.

Note, this is not an overnight process. Building good credit takes times. Sadly, destroying it can be done virtually overnight. If you have already written an offer on a house and are trying to find a way to quickly shoot up your credit score, I’ll be honest with you: it isn’t possible. However, if you want to get your credit in shape so that in 6 months to a year from now you are well positioned to purchase a home and continue building a solid credit history, then you are the target audience for this brief write up.

WHAT IS A CREDIT ‘SCORE?’
There are really two elements to your credit. There is the score (called a ‘Beacon Score’ in Canada and a ‘FICO Score’ in the U.S.), and then there are the ‘Trade lines.’ Let’s address each in turn:

Beacon Score
Your Beacon Score or ‘Credit Score’ is the first thing that a lender looks at. It is a mathematically derived number that takes into account the number of accounts that you have, the length of time they have existed, the amount owing, the percentage of the credit limit being used, and any collections / judgments against you. The theoretically score ranges from 300 (low) to 900 (high). However, rarely are people below 480 unless they are in the midst of a financial crisis, and rarely are people above 820 just due to the way the formula works.

Most people with decent credit have a score of around 680. This is a solid score that gets you access to virtually EVERY lending program at full discounts.

There is NO fast way to boost your credit score. Each month, the different creditors you have report the current status of your loan / credit card / account. They report randomly and at varying days of the month. If you happen to be in arrears on the day they report, then you will show as a late payment even if it is only one day late! This system is in place to prevent people from manipulating the credit score. There is no one you can contact to boost it quickly, and there is no trick that will run it up fast. Credit, like a personal reputation, takes a lot of time and effort to build, but only a single mistake to harm.

Trade Lines
These are the individual accounts that you have. For example, if you have a card with MBNA Mastercard, the credit report shows the authorized limit, the amount of debt outstanding, your monthly payment, how long you have had the account, and if you have been late on payments at any time in the last 5 years. Five years! That is a long time that stuff will remain on your bureau. It will also show how many times you have been 30, 60, or 90 days late on your payments in the last 5 years.

Each account has a separate trade line that reports ALL of the above information. There are a few items that do not report to the credit bureau companies at this time. They are: mortgages on residential properties with a bank (credit unions DO report), loans in your business name, some auto or equipment lease companies, and some savings and loan companies.

How Do You View Your Credit
There are two credit reporting agencies in Canada and three in the United States. The most commonly used agency in Canada is Equifax. They can be found at www.equifax.ca and you can order a report instantly online for around $20. This is something that you should do periodically to make sure that nothing incorrect is reporting or that any errors are cleared up. Errors do occur! Not surprisingly, they are usually not in your favour. You can also get a copy of your credit bureau for free, once per year, by phoning Equifax and leaving a message (it is a hokey system but personal experience has shown that it does work).

Once you have your credit bureau, review it for inconsistencies. If you find that someone says you missed a payment but you think you did not, then the onus is on you to prove that you made the payment on time. Simply calling to complain is not only futile, it is not possible. If you have requested a copy of your bureau from Equifax, a number will appear on the report that you are to call for any corrections. This number is not a public number and it varies depending on what area you are living in. You can only get this number once you have gotten your credit bureau report sent to you.

Note: A lender will NOT accept a copy of the credit bureau that you give to them. They will insist that they pull their own copy directly from the credit bureau to avoid any possible fraud or manipulations (they DO occur frequently).

Inquiries and Credit Seeking

Most people are unaware that the more times people/companies look at your credit, the more it hurts you. The only exception to this rule is when YOU look at your bureau as this process does not have a derogatory effect.

Why? You may ask. Every time someone (a bank, credit card company, cell phone company, or anyone else) looks at your credit, it is recorded on your credit as to what date, and who pulled your credit to look at it. If a bank sees that you had our credit pulled at another bank, but doesn’t see a corresponding ‘trade line’ that shows what you got loaned to you, they wonder what happened. Did you get declined? Did you get the loan and it is not showing up? Are you trying to get the loan from multiple people? Are you in dire financial straights and need a loan? They don’t know for certain. The only thing that they do know is that you are seeking credit for one reason or another. As more and more and more people look at your bureau, not only does it look suspicious to the lenders, but it lowers your Beacon Score!!! Each inquiry doesn’t lower it by much, but when taken as a whole, 30 applications in a 3 month period of time can be very harmful to your credit and will raise all sorts of ‘red flags’ to the lender.

Some people make every payment on time, all their life, and then find out their credit score is low because of all the applications they put out there but never followed through on.

Does this situation sound familiar? You walk into a mall, or at a hockey game, and a young person approaches you with a ‘Free gift if you will apply for this mastercard.’ You think that there is no harm because you don’t really intend on taking the credit card, but you do intend on taking the gift. You walk away, and ignore all their mail and phone calls and think you have gotten something for nothing. What you don’t know is that they have pulled your credit and left their mark on it. Every loan you apply for, for at least the next two years, will now be influenced by that simple inquiry. Bottom line: don’t take the gift.

I Have Lots of Credit, Use it Well, but My Score is Low. Why?
There are a couple of other things that lower your score aside from credit seeking (or the appearance of credit seeking). The first one is having too many active accounts. Even if you manage them all well, the fact that you have 3 Visa cards, 4 Mastercards, 2 American Express cards, a car loan, boat loan, Sears card, etc… all combine to make it look like you could get into financial difficulty because you could run up your debt level. Having too much credit can result in lenders wanting you to close out some accounts before they will approve your mortgage and this leads to hassle and trouble later on.

Another thing that may lower your score is owing as much, more, or close to the authorized limit. For example, if you have a credit card with a limit of $5,000, and you owe $4,000 or more on that card, it will have a slightly harmful effect on your score because you are close to the limit and it appears you don’t have the funds to pay it off. If you are AT the limit, the effect is even stronger. If you are slightly over your limit, then the effect is very harsh. Even if you never miss a payment, but at the end of the month the interest is added to the card (and you apply for a mortgage before paying it down), the score will be lowered as it appears that you are exceeding the authorized limit. These rules may not appear fair, but it is the way that credit is calculated in Canada and there are no ways around it.

Ok, I Want to Fix My Credit Now. What Can I Do?
If you have had some troubles in the past, and you want to better your score for a future mortgage or home purchase, there are several things you can do to bolster your score. They are:

1. Do not apply for any other debt. Each inquiry hurts your score, remember?
2. Pay down your balances to below 50% of the authorized limit. The lower the better.
3. Do not miss any payments. Sounds simple? It is the most common reason for bad credit for obvious reasons
4. Keep your addresses on file updated with lenders if you move
5. Do not move around a lot as this looks dicey to lenders even if justified
6. Pay your parking and traffic violation tickets. They can end up at collections and ultimately on your credit which will lower your score substantially.
7. Clear up old debts and get it ‘in writing’ that it is paid in full. Keep this proof on file!!
8. Pull your credit once a year to review it and make sure it is up to date
9. Contact Equifax immediately if something is wrong and get proof in writing that it is fixed.
10. Close unused and unwanted / unneeded accounts

How Long Will It Take to Raise My Score?
Credit, like your personal reputation, is built up over time. Usually the credit bureau is behind by about 1 to 2 months. If it shows that you are in arrears on, say, your credit card, and you make a payment, it may not be reflected for 4 to 6 weeks. Credit is not instant, and you cannot make quick repairs. You can expect repairs to take 6 months to 2 years depending on how severe the credit problems were. There is no fast way to fix it other than continuing to use your accounts and continuing to pay them off in full as soon as you can.

What if I Have a Bankruptcy In My Past?
This is a complicated area of borrowing. You may still be eligible for fully discounted rates, even if you are a past bankrupt. Please request my other report: Past Bankruptcy for specific programs and advice pertaining to credit repair in this unique financial situation. Contact me directly if you are in this situation.